Time to Change the Old Tunes

Alistair Darling
Labour MP for Edinburgh South West, former Chancellor of the Exchequer and leader of the Better Together campaign

There was a historic shift in the independence debate this week - but you might not have noticed it.

The row of the last few days has focused on the gap between what the SNP Government says in public about the affordability of an oil fund and what their economic advisers told them in private. As important as the issues of trust raised by this affair were, the really significant consequence of this week's debate is the SNP's admission that all oil taxes are used to fund current spending.

The modern SNP has been built on the idea that Scotland's oil resources have been misappropriated by Westminster. The symbolic policy which gives life to this argument today is the SNP's suggestion that oil taxes would be paid into an Oil Fund. As the real political debate continues about how best to deal with difficult public finances, the SNP maintain a language of surplus: "oil is not the basis of the Scottish economy," Alex Salmond tells us "it is a bonus."

The fiction of oil surpluses is so central to the nationalist story that they cannot bring themselves to accept the economic realities of Scotland. In a recent radio debate, the SNP Minister for External Affairs, Fiona Hyslop, was confronted with her own Government's figures which show the difference between what Scotland spends and what we raise in taxes (including all our oil revenues) was £7.6billion. She simply denied there was a deficit at all.

Ministers go to extraordinary lengths to deny there is fiscal deficit in order to sustain their narrative of Scottish oil wealth being squandered. They compare historic levels of taxation between Scotland and the rest of the UK, but ignore the higher levels of spending in Scotland. They compare the proportion of UK taxation paid by Scots with the proportion of UK spending received by Scots, preferring to quote percentages because the cash figures take you inescapably back to that £7.6billion shortfall.

In the secret cabinet paper, leaked to Better Together in the Spring, the uncomfortable truths that causes such contortions were laid bare. SNP Ministers rarely appear in front of a camera or microphone without claiming that we are in a better position than the rest of the UK. But in that private cabinet briefing John Swinney warned that, by the time of independence, "Scotland would have a marginally higher net fiscal deficit than the rest of the UK."

That first leaked paper also exposed the SNP leadership's private worry that the "high level of volatility" in oil revenues created big risks for an independent Scotland. As a separate state, as much as 20% of our taxes would depend on North Sea revenues. Today, as part of the UK, tax-take is less than 2%. This matters because the higher public spending in Scotland, largely accounted for by the public services overseen by the Scottish Parliament, is protected from the fluctuations of the world oil price.

That brings us to the events of the last few days.

The SNP's response to the volatility issue was to offer not just one, but two oil funds. In addition to the original oil fund, they now advocate a second instability fund where money would be set aside to mitigate the volatility of oil revenues. Making this announcement John Swinney gave a promise that he could pay into these funds immediately after independence without there being either a rise in taxes or cuts to existing spending.

Then private ministerial papers were released showing officials repeatedly warning the SNP that Scotland could not start paying into an oil fund without tax rises or spending cuts. It is worth quoting directly:

"Scotland has run a net fiscal deficit in 20 of the past 21 years. This suggests that over this period North Sea Oil receipts would have been required to fund public services in Scotland rather than being invested in an oil fund."

Faced with the fact that Scotland's oil taxes are needed to fund Scotland's public services, John Swinney made a decision that alter the terms of the independence debate forever. He made it clear on Good Morning Scotland that he favoured borrowing money to pay into an oil fund.

The confidential papers warned ministers against the strategy. Their analysis was that a fund paid for by borrowing would make a loss because the cost of borrowing would be bigger than the returns from the fund. Rather than saving money for the future, they warned, this would risk actually losing money.

No-wonder Scottish Ministers fought for a year to supress the release of this analysis, borrowing to save is such a daft idea that it leads you back to the conclusion that to set up an oil fund they would have little choice but to raise taxes or cut spending.

There is a practical question as to whether an oil fund which is financed by borrowing, not oil taxes, is really an oil fund at all. But the really significant consequence of the decision to borrow to pay into an oil fund is that it removes the central premise of their economic story - that unutilised oil money exists that Scotland could use. It is dishonest and dangerous for the nationalists to continue to make promises on the basis of a fiscal analysis they know to be untrue.

The SNP need a new economic story to tell. A government which had a surplus of oil money would not have to borrow in order to save in an oil fund. If oil really was a 'bonus' why would we have to borrow?

Over the last few days we have seen the nationalists launch a new policy to deal with oil volatility that would add extra pressure to Scottish finances. We have read the SNP's own economic advisers warn that the impact of their oil fund would be higher taxes or cuts to public services. We have heard John Swinney say that he would borrow money to gamble in an oil fund. And most significantly, we finally have an admission that there are not huge sums of unused oil taxes that can be spent on new policies.

Of course, Scotland could decide to go it alone. The question for us as Scots is whether it would be better for us. Is it worth the risk?

Alistair Darling is the Chair of Better Together and Labour MP for Edinburgh South West - this blog first appeared on the Better Together campaign blog, and can be read here